The Registered Disability Savings Plan (RDSP) is a government assisted savings vehicle introduced in the 2007 Federal Budget. The plan is available for individuals that qualify for the Disability Tax Credit (DTC) and is intended to help ensure the financial security of an individual with a severe disability when parents and grandparents are no longer available to provide support.
Taking money out of the plan
The RDSP beneficiary can take money out of the plan at any time, subject to certain restrictions. The beneficiary must however begin to take regular payments from the RDSP at or before age 60.
There are two types of payments that can be taken from the RDSP. Regular payments are called Lifetime Disability Assistance Payments (LDAPs). One-time payments taken from the RDSP are known as Disability Assistance Payments (DAPs).
Any payment taken from the RDSP is potentially subject to income tax. Each payment taken from the RDSP consists of three parts: private contributions, government contributions and investment earnings. Only the portion of the payments that consist of government contributions and investment earnings are taxable.
Repayment rules
Prior to 1 January 2014, all grants and bonds paid into the RDSP in the previous 10 years must be repaid to the Government when any of the following events occurred:
- there is a withdrawal from the RDSP;
- the RDSP is deregistered or closed;
- the beneficiary is no longer DTC-eligible; or
- the beneficiary dies.
This ten-year amount is known as the Assistance Holdback Amount (AHA). To allow beneficiaries greater access to their funds when necessary, the government introduced the proportional repayment rule. The new rule applies to withdrawals only, the ten-year AHA will continue in place for all other situations referred to above.
The new proportional repayment rule requires $3 be repaid to the Government for every $1 that is withdrawn, up to a maximum equivalent to the AHA.
How much can I take out?
The Income Tax Act (ITA) specifies how much can be withdrawn from a plan within a calendar year. The first consideration is whether the RDSP contains more government contributions than private contributions. If there are more government contributions, the plan is considered a Primarily Government Assisted Plan (PGAP). Alternatively when the plan is primarily funded by private contributions the plan is considered non-PGAP. Withdrawal limits are calculated differently if the plan is PGAP rather than non-PGAP.
PGAP – DAP
- Less than or equal to the greater of: the amount as determined by the formula at s 146.4(4)(l) of the ITA (“the Formula”) or 10% of the total assets.
PGAP – LDAP
- The amount as determined by the Formula.
Non-PGAP – DAP
- Any Amount
Non-PGAP – LDAP
- If the beneficiary has reached age 60: an amount greater than or equal to the amount as determined by the Formula.
- If the beneficiary has not reached age 60, there is no minimum withdrawal limit.
Specified Disability Savings Plan
The Specified Disability Savings Plan (SDSP) provides beneficiaries with shortened life expectancy greater flexibility when accessing their RDSP savings. To designate a plan as SDSP, an election needs to be filed.
Once the plan is designated SDSP, the withdrawal of funds will not trigger the proportional repayment rule or the AHA. However, once the designation is made, no more contributions can be made and the beneficiary is no longer eligible to receive CDSG or CDSB contributions. Payments must start no later than the first calendar year following the year the plan was designated as a SDSP. The designation will be removed if the restrictions are not followed.
Conclusion
It is vital to know the RDSP withdrawal rules. Although, recent changes have reduced the penalties for early withdrawals from your RDSP, the program is still more advantageous for long-term savers (ten years or greater). If you think you may need to remove money from your RDSP for short-term expenses, a Tax Free Savings Account (TFSA) may be a better option.
It is also important to know that for beneficiaries with shortened life expectancy due to their disability can still benefit from the RDSP program.
The Disability Tax Credit is an excellent initiative by the federal government to help families plan for the long term care of family members suffering from severe disabilities. At Siskinds we understand the intricacies of applying and qualifying for the Disability Tax Credit.
At Siskinds we understand the intricacies of applying and qualifying for the Disability Tax Credit. If you have any questions please contact Laura Geddes at [email protected] or 877.672.2121.